First Rate Hike in 9 Years
When the Feds take a look at the December 4th Jobs Report, it’s almost certain that on December 16th they will go ahead and pull the trigger on the first hike in over 9 years! Last week Atlanta Fed President, Dennis Lockhart, said that the markets are well prepared for a rate hike, although he thinks they will be gradual and not at every meeting. So what does that mean to us? While the media would lead us to believe that interest rates will go up, history provides a different perspective. Let’s take a look at how the market reacted in 2004 when the Fed began a string of rate hikes.
Federal Funds Rate vs. 10-Year Treasury
If we look at the chart below, you can see that on June 1, 2004 the federal funds rate (in red) was at 1.00% and the 10-year treasury note yield (blue) was trading at 4.73%. Five months later, the Fed had raised rates by 0.75%, and the 10-year yield actually dropped 0.53% to 4.20%. And 3 months after that, when the Fed had raised rates by 1.50%, the 10-year yield dropped to 4.17%…56 basis points lower than when the Fed started hiking. Fast forward to July 1, 2006 – the Fed has hiked rates by 4.25% and the 10-year yield has only risen by 0.36% to 5.09%. History does not always repeat itself, but it often rhymes – meaning we could see interest rates actually improve after the Fed begins hiking on the 16th.
A Recent Example: Quantitative Easing
Since 2004 was a long time ago, let’s take a look at a more recent example. On January 1, 2014, the Fed began tapering Quantitative Easing (Q.E.). This is when the Fed began lowering the amount of mortgage bonds and treasuries that they were purchasing each month in an effort to keep rates low. Although QE is not a rate hike, it is another form of “tightening” or taking a course of action to constrict spending. When we look at the chart below, you can see that the 10-year yield was trading at 3.00% once the Fed began tapering. Later that year on October 29, once the Fed finished tapering and stopped purchasing bonds each month, the 10-year treasury yield dropped 0.71% to 2.29%. Yields are even lower today, at 2.27%.
Will Interest Rates Rise?
Again, there is no guarantee that the markets will react the same way they have previously, but if history is any guide, once the Fed tightens there is a good chance that we could see interest rates improve. Whether they do or don’t, it never hurts to have a professional keep an eye on them…and that’s our job! Contact us today if you’re curious to see if rates could help you finish the year on the right note and ring in the new year with financial promise!